Government construction contracts and the EEC

New standard form sets out very strict rules, notably on subcontracting and penalties for delays

Of the 1 trillion baht in investment expected to pour into the government’s flagship Eastern Economic Corridor in Chachoengsao, Chon Buri and Rayong, about 500 billion baht is expected to take the form of public procurement — government construction contracts and purchase agreements — with 300 billion to be financed by borrowing spread over the next five years.

Under these contracts, state agencies or enterprises will directly hire domestic and international contractors, using funds from the government budget, to develop EEC infrastructure and other facilities for 10 targeted industries, in parallel with another 580 billion baht to be financed by the public-private partnership (PPP) method.

In preparation for the massive EEC programme, the government has prescribed the standard form of government construction contracts to be utilised for all development projects nationwide, effective from Feb 20, 2018. It takes the form of a regulation of the Public Procurement Policy Committee, published in the Royal Gazette under the Public Procurement Act 2017.

Any private-sector contractor, Thai or foreign, who enters into a construction contract with a government agency under the EEC scheme must use this standard form, which has the effect of law. Failure to use the standard form, or arbitrary revisions of material provisions that are not authorised by the Office of the Attorney General (OAG), could render the entire contract null and void.

A construction contract in English with a foreign contractor is permitted, with a Thai language synopsis of pre-defined issues to be provided by the agency owner. The synopsis outlines material provisions in the English contracts and also serves as an indicator of material provisions in Thai construction contracts in general. These cannot be varied without the prior consent of the OAG.

These provisions include the clauses on engagement of the contractor, contract value and payments, delivery and terms of the agreement, penalties and liquidated damages, performance bond, defect liability assurance, contract termination, dispute resolution, and rights and liabilities of the contractual parties.

The last item on the list, in effect, classifies nearly all provisions as material because nearly every one concerns a right or liability of the contractor or the owner. To be on the safe side, any change to the standard form should be made only after it is pre-approved by the OAG.

Only a few exceptions are provided. For instance, the three-airport EEC rail line is envisioned as a PPP. If it comes under government procurement restrictions by reason of the state holding 50% or more in the PPP, it could follow the existing template for the Red and Blue lines in Bangkok, which the OAG has already approved, rather than the new standard form.

Some provisions in the new form can be seen as imposing hefty burdens on the contractor, compared with construction contracts in the private sector.

The most prevalent practice in any construction project is subcontracting. A private-sector construction grants the contractor flexibility to choose subcontractors, subject to prior approval of the owner or by simply giving notice to the owner. There is no express penalty in a private contract for a breach by the contractor of this requirement.

The government contract takes the issue of subcontracting very seriously. First, subcontracting of the entire work is absolutely prohibited. Second, partial subcontracting or work must receive prior written approval from the owner agency. A breach by the contractor of this clause is punishable by a mandatory penalty of at least 10% of the subcontract value, without prejudicing the right of the owner to terminate the contract.

Liquidated damages for delays are likewise far stricter than in a private-sector contract. The owner agency has discretion to impose daily liquidated damages in a wide range of 0.01% to 0.1% of the contract value — the contractor can learn the exact rate from the invitation to bid. The rate of liquidated damages can go up to 0.25% per day in an infrastructure contract where delays affect road traffic.

In stark contrast to a private-sector contract, the standard form does not limit the liability of the contractor at 10% of the contract value, which means the liquidated damages could ultimately eat up 100% of the value if there are protracted delays.

On top of the liquidated damages, the contractor must pay the daily fees of the consulting company that the owner agency hires to supervise construction for each day of delay.

Express consent of the contractor is stated to pay other damages to the government, should they exceed the liquidated damages and the consultant’s fee. Under these delay circumstances, the owner agency can terminate the contract if it deems that the contractor is unlikely to be able to complete the work as scheduled.

In that case, the liquidated damages do not end on the missed completion date but continue to run until the actual contract termination date. Both the performance bond and retention money will be confiscated and the contractor will be compelled to pay back the remainder of the advance payment.

This advance payment is legally construed as an interest-free loan made by the owner to the contractor at the outset. It’s striking that in deducting a portion of the advance payment against each instalment of the contract price, the government owner is eligible to deduct 100% of the monthly instalment, if it is a unit-price contract, compared with 10-20% in the private sector. This could deprive the contractor of monthly cash flow.

The amount of the advance payment and the advance payment bond that secures it, as well as bid bonds, performance bonds and retention money must comply with the separate Public Procurement Regulation of the Finance Ministry, as prescribed under the Public Procurement Act 2017.

An advance payment by an owner agency must not exceed 15% of the contract value paid against a bond of the same amount provided by the contractor and issued by a bank operating in Thailand. The bond is to be returned to the contractor and the bank upon full repayment of the advance payment and is capable of diminishing in value in proportion to the repayments.

In case of termination by the government, the owner agency will no longer pay instalments; thus the repayment of the advance will be accelerated and the bond called.

Under the ministerial regulation, the contractor must provide a performance bond amounting to 10% of the contract value, normally before an advance payment can be made.

To the dismay of banks and their overseas counter-guarantors and contractors alike, the advance payment and performance bonds for government contracts usually do not specify expiry dates. They are open-ended as the regulation calls for them to remain valid “as long as the contractor still has obligations under the construction contract”.

The good news is that in international bidding that involves multinational contractors, the government now accepts bid bonds and performance bonds issued by foreign banks without any presence in the country.

Any private-sector contractor, Thai or foreign, who enters into a construction contract with a government agency under the EEC scheme must use this standard form.